Re-examining the market at new highs

I updated my market view in December last year, when I believed there was a high possibility of an economic recession turning into a crisis.

Now, three months later, both the external environment and the market have changed. Some of the previous judgments need to be corrected in time. Today is the first day of March. Let's re-examine the market. I will try to use simple arguments to explain my views.

1. Macroeconomics & Monetary Policy

1. The view on the US economic recession remains unchanged

Previous articles have suggested that the United States will experience a recession this year or next. Currently, the United Kingdom and Japan have already fallen into a technical recession, and my country has actually stepped into it. Countries in Europe and Southeast Asia are not doing well, and the same is true for the United States. The current banking industry, commercial real estate, and credit in the United States all have hidden dangers.

The United States is still doing well compared to other countries. Employment data is relatively strong, and the return of manufacturing has begun to bear fruit, so several key indicators of the US economy look relatively good, but as high interest rates remain, the damage to the economy will continue.

Expectations of interest rate cuts in February, March and even May may not materialize

Previously, the market expected the US to start cutting interest rates in March, and I share this view. I think the Fed might make a preventive rate cut. However, judging from the CPI data released in January and the speeches of Fed officials, there is a high probability that there will be no rate cut in March, and there may not be a rate cut in May. The current Fed is worried that the fight against inflation will not turn into stagflation like in the 1970s, and is also worried that raising interest rates too much will affect the economy. At present, the former is more likely.

In addition, from the perspective of conspiracy theories, no major economy has been devastated by the US interest rate hikes, the US’s goals have not yet been achieved, and the whole world is struggling.

3. The first quarter should be relatively safe

As for when the crisis will come, I thought at the end of last year that there might be obvious crisis signals in the first or second quarter of this year. Thanks to the outstanding performance of technology companies such as Nvidia, which has played a good role in guiding the sentiment of the US stock market, small-cap stocks have also begun to recover.

The market has somewhat ignored the failure of the interest rate cut and started to favor medium- and long-term US bonds. Moreover, the Federal Reserve seems to be paying close attention to the hidden dangers of credit and real estate, and may adopt tools and measures such as BTFP to deal with potential crises that may arise, and even if they occur, they may be quickly resolved.

In summary, based on the information currently available, both economic data and financial market data are still relatively healthy. We will take it one step at a time and temporarily judge that the macroeconomic situation in the first quarter is still a safe period.

Some say that the residents' excess savings are about to be exhausted, and some say that the US data is falsified to cover up the truth. There are various doubts, which I think are all reasonable. However, we cannot make bets based on subjective guesses, but must rely on the published data.

2. Crypto Market

When I wrote the article at the end of last year, I had already clearly stated that it was already a bull market. At that time, the price of Bitcoin was more than 30,000. Only three months have passed and it has already reached 64,000. No one should question whether it is a bull market or a bear market.

What are the current market characteristics:

1. Changes in narrative logic

This round of market that started at the end of October last year was driven by BTC ETF. After the ETF was approved, except for the first few days when Grayscale sold, there was a net inflow at other times, proving that off-market funds continued to flow out. Old investors were beaten by the 22-year bear market, and many people with conservative risk preferences missed out and dared not buy BTC. New funds do not have these concerns, and the assets managed by these asset management institutions are tens of billions of US dollars. Any leakage can pull BTC to a very high price, so we can have higher expectations for the price of Bitcoin in this round of market.

2. Limited capital outflow

This time, the market is also clearly divided. Because only BTC ETF has been approved, the funds that enter the market through ETF can only buy BTC and cannot be converted into purchasing power for other products.

We can see that BTC is the only one that is doing well in this bull market, and the altcoins that perform well in this bull market are usually driven by hot spots and institutional market makers. The past situation where all coins rose everywhere as soon as they were launched has almost never happened.

The market is speculating on new coins, not old ones. Although this is the case in every bull market, in previous bull markets, old coins may have a good increase or even a new high under the condition of capital spillover. In this bull market, we have seen that capital spillover is extremely limited. The endless new coins and hot spots that emerge every day have absorbed a lot of funds. A large number of old coins are still lying at the bottom and almost moving, and they have lost more than 80% compared with the high point of the previous bull market.

Maybe those who are deeply trapped will never get out of the trap, so give up the fantasy and face the reality. Maybe the new coin will increase by 3 times, while the old coin will only increase by 30%.

3. The market is more specialized

Since the last bull market, more and more professional institutions and personnel have participated in the market. Whether it is the team's financial strength, resources, technology, or investment research capabilities, they are all incomparable to small investors. In addition to investment in the primary market, the competition for secondary market transactions and even participation in new projects on the chain is already very fierce, and the survival space and rate of return of small investors will continue to be compressed. It would be better for us small investors to participate in some niche areas that institutions are less willing to participate in, such as staking and early project interactions, to avoid direct competition with institutions in the secondary market.

4. Projects are generally overvalued

The same is true in 2017 and 2021. In the bull market, there is sufficient capital and the market has high expectations for projects, so the valuation is also high. Projects are listed on the secondary market with a market value of hundreds of millions or even billions. Therefore, at this stage of market development, it is still difficult to buy ten times the value of coins in the secondary market. Once the adjustment begins or the upward trend ends, the adjustment will not be small.

We try to choose some deterministic tracks, such as AI, RWA, SOL, Bitcoin ecology, blockchain games, and modularization, and select 1-2 leading projects in each track to participate. Or we can delve into a track, study it thoroughly, participate in early projects, and earn excess returns, which is also a good choice.

You can't sell your stocks and change positions today when you see that this stock has gone up but yours hasn't, and then change positions again tomorrow when that stock has gone up. If you frequently adjust your positions, you will end up with nothing.

5. AI Narrative

If the main axis of this bull market is that BTC ETF can bring a steady stream of capital inflows to the crypto market, then AI is the biggest narrative of the market. The seven technology giants support the US stock market, and the most eye-catching one among them is Nvidia, which benefits from AI. The stock prices of Tesla, Apple and other companies that performed poorly in the AI ​​narrative began to fall behind.

Regardless of whether you think AI will eventually burst like the Internet in 2000, it is currently the main logic for the market's rise. As long as the momentum of AI in the US stock market does not end, the story of AI in the crypto market will not end either. This is the most certain logic.

Conclusion

I still believe that the US will fall into recession in the fourth quarter of this year or early next year. The sentiment in the financial market is like a pendulum, always swinging between extreme optimism and pessimism. When the economy reveals problems, the market will also become pessimistic, which will surely drive the risk market down.

It is fine to prepare for the worst, but don't bet too early on a crisis that has not yet occurred. Black swans cannot be guessed, and it is not too late to wait for the confirmed signal to appear before making a decision. There will definitely be various signs before a real crisis breaks out. When the external environment is still relatively safe, you should appropriately increase your risk appetite.

Reflecting on the past few months, I have been hesitant to increase my positions too much because I was worried about the impact of high interest rates on the economy and financial markets. I wanted to miss out on a lot of gains when the market went up a little. The only consolation is that I did not short.

I am a typical person who presets a conclusion and then predicts the market along the path. My ideas are too far ahead of the market. In fact, it is completely unnecessary to think about it now. I will learn from it in the future.